UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
THE LEAST DEVELOPED COUNTRIES
REPORT 2009
The State and Development Governance
OVERVIEW
by the Secretary-General of UNCTAD
UNITED NATIONS
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this Report
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16 July 2009, 17
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
Geneva
The Least Developed Countries
Report 2009
The State and Development Governance
Overview
by the Secretary-General of UNCTAD
UNITED NATIONS
New York and Geneva, 2009
Note
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one thousand million.
Material in this publication may be freely quoted or reprinted, but
a­ cknowledgement is requested, together with a reference to the document
number. A copy of the publication containing the quotation or reprint should
be sent to the UNCTAD secretariat.
The Overview contained herein is also issued as part of The Least
Developed Countries Report 2009 (UNCTAD/LDC/2009), sales no.
E.09.II.D.9).
UNCTAD/LDC/2009 (Overview)
This Overview can also be found on the Internet,
in all six official languages of the United Nations at www.unctad.org/ldcr
1. Implications of the global economic crisis
in LDCs: A turning point for change
The Least Developed Countries Report 2009 argues that the impact of the
global economic crisis is likely to be so severe in the least developed countries
(LDCs) that “business as usual” is no longer possible. This will necessitate a
rethinking of the development paradigm. The magnitude of the crisis offers
both the necessity and an opportunity for change. Coping with the impact
of the crisis in LDCs will require an innovative and informed policy design
response. But beyond this, new policy approaches are necessary to ensure that
development after the crisis will be more resilient and more inclusive.
It is widely recognized that the current financial crisis is the result of
weaknesses in the neo-liberal model that has been shaping global economic
policies in the last three decades, weaknesses that have been magnified by
policy failures and lax regulation in the advanced countries. The cost in terms of
the bailouts and recapitalization of banks has already reached unprecedented
levels. However, the adverse impact on the real economy and the cost in terms
of lost output and employment are now the great concern. Most advanced
economies are in recession and emerging markets are undergoing significant
slowdowns. But the LDCs are likely to be particularly hard hit in the coming
period. Because they are deeply integrated into the global economy, they are
highly exposed to external shocks. Moreover, many are still suffering the adverse
impact of recent energy and food crises, and they have the least capacity to
cope with yet another major economic disruption. The combination of high
exposure to shocks as well as weak resilience to those shocks is likely to mean
that the LDCs, which already face chronic development challenges, will be
harder hit than most other developing countries.
The crisis is already undermining those factors that enabled the strong
growth performance of the LDCs as a group between 2002 and 2007. Their
vulnerability is not just a reflection of traditional commodity dependence and
related sensitivity to price fluctuations; it is due to the combined threat from
falling commodity prices, the slowdown in global demand and the contraction
in financial flows. As a result, manufactures and service exporters (mostly Asian
and island LDCs) are likely to be hit hard, but the commodity-dependent
economies (mostly African LDCs) will be hit even harder. The LDCs are unlikely
1
to weather the crisis without considerable additional international assistance in
the short run and support for alternative development strategies in the longer
run. Changes on both fronts will be needed to induce a steadier and more
resilient development trajectory.
As noted in previous Least Developed Countries Reports, most LDCs (with
the exception of oil-exporting LDCs) have quasi-chronic deficits in their trade
and current accounts. Faced with decreasing global demand — UN estimates in
May this year expect world gross domestic product (GDP) to decline by 2.6 per
cent in 2009 — the current account imbalances are likely to deteriorate even
further as export revenue diminishes. The vulnerability of LDCs is related to the
highly concentrated production and export structures of commodity-dependent
LDCs, especially African LDCs, as well as the dependence of Asian LDCs on
low-skill manufactures. The global recession is likely to constrain international
Selected commodity price indexes, Jan. 2000-Feb. 2009
Index 2000=100
(Index, 2000=100)
800
500
700
400
600
300
500
200
400
100
300
0
200
-100
100
-200
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
All food (right scale)
Crude petroleum (left scale)
Agricultural raw materials (right scale)
Minerals, ores and metals (left scale)
Source: UNCTAD secretariat calculations based on data from GlobStat.
2
-300
2009
trade and impede long-term investment, representing an additional source
of contraction of LDC output and exports. Asian LDCs are somewhat more
diversified and can better withstand the crisis, although their situation is hardly
enviable. The crisis is likely to result in substantial reduction of their exports
(both in volumes and prices) associated with a slowdown in global demand,
especially in China and India. The external payments imbalances on the
current account are likely to be exacerbated by trends in capital flows. Private
capital flows, including both FDI and remittances, are predicted to decline, and
if the experience of previous economic crises is repeated, official development
assistance (ODA) will decline, too. In this context, the future of ODA will be
vital. The international reserves of LDCs accumulated during the years of export
boom may be insufficient protection from significant and persistent current
account shocks associated with the drying up of external sources of finance.
Excessive commodity dependence exposes most LDCs to large terms of trade
shocks. Indeed, many countries have recently gone through years of record
growth performance driven primarily by commodity sectors and propelled by
the boom in international prices stemming from speculation in commodity
derivatives. In mid-2008, however, the eruption of the global crisis put a sudden
end to this boom and there have since been sharp price reversals. Such boomand-bust cycles have contributed to output volatility and uncertainty, thereby
discouraging investment in long-term development of productive capacities.
A sharp contraction in commodity markets is particularly damaging to LDCs
for an additional reason; contractions in demand, prices and output imply a
reduction in government revenues, thereby reducing the capacity of the state
to utilize fiscal policy to mitigate output volatility.
Moreover, external vulnerability of LDCs is further aggravated by their
high level of indebtedness; in LDCs, the debt burden represents on average
42 per cent of gross national income, compared to 26 per cent in other
developing countries before the crisis. As UNCTAD has repeatedly warned in
recent months, there is the potential for a new debt crisis to emerge in poor
countries. For many LDCs, the current crisis can jeopardize their hard-won
debt sustainability.
What happens in the future to external financial flows is critical. Although
there may be differences from country to country, the general expectation is
that foreign direct investment (FDI) to LDCs will decline over the next few years,
owing to (a) lower expectation of profitability; (b) reduced access to credit to
3
finance new investments; and (c) balance sheet consolidation by transnational
corporations in the face of financial pressures. This is particularly true of FDI to
LDCs, which has been predominantly natural resource-seeking and focused on
the extractive sectors, and which is likely to decline during 2008 and beyond
because of sharply falling mineral prices and the transnational corporations’
cautious approach to exploration and expansion during this volatile period.
Remittances are also set to decline. Workers’ remittances have become an
important supplement to basic incomes in LDCs, where they generally support
consumption rather than investment. According to World Bank estimates,
remittances to developing countries as a whole have been increasing at a slower
pace in recent years, with the annual increase down from 18 per cent in 2006
to 9 per cent in 2008. They are expected to decline by 5 per cent in 2009, with
a possible slight recovery in 2010.
Against this background, official aid trends will become a central determinant
of what happens to LDCs. Unfortunately, past experience shows that ODA tends
to decline during recessions in donor countries. It will be critical that donors
maintain the levels of aid to the LDCs and also honour their commitments
for increased aid. As we have argued in past Least Developed Countries
Reports, there is a major tension between aid delivery mechanisms, including
the working of policy conditionality, and national ownership of policies. It is
therefore vital that the increased aid dependence – which is a likely outcome
of the crisis – is not associated with diminished policy space, in the sense of the
ability to choose appropriate policy options.
The recent financial and economic crisis has exposed the myth of selfregulating markets. In response to the crisis, most large developed market
economies have shifted away from free market-based forms of economic
governance and are exploring alternatives that include a much bigger role for the
state in economic management. These countries recognize that the alternative
has to involve giving the state a greater role, not only through regulation but
— more importantly — through Keynesian fiscal stimulus packages, of the kind
being currently pursued in most large Western nations. Yet, this tendency has
been more evident in the advanced countries than in the developing world.
More recently, several larger developing countries — such as China, Brazil
and South Africa — have begun to deploy public stimulus packages to revive
their economies. However, most LDCs simply cannot afford to deploy similar
packages.
4
In the last decades, most LDCs have followed economic reform programmes
which have severely reduced government involvement in promoting
development. However, these programmes have not been able to address
the key structural constraints which LDCs face, including (a) bottlenecks in
production, related to the structure of their balance-of-payment deficits; (b)
inadequate infrastructure; (c) chronic deficits; (d) serious skills and knowledge
shortages; and (e) vulnerability to external shocks. Furthermore, these policies
based on minimal government action have not led to structural change and
economic diversification. Instead, LDCs have even further deepened their
unfavourable production patterns and specialization in exports of commodities,
and many LDCs have undergone deindustrialization and seen stagnating
performance of their manufacturing sectors. This has increased their exposure
and vulnerability to external market shocks.
The current financial crisis thus exposes a deeper, long-term development
problem. Despite record rates of GDP growth over the last five years, coinciding
with the commodity boom, poverty reduction has been slow in the majority of
LDCs, and most remain off-track to meet the Millennium Development Goals.
In addition, many are facing recurrent crises of food security. These patterns
are rooted in the combination of an accumulating crisis in agriculture as well
as an inability to generate productive employment outside agriculture. The
crisis in agriculture is rooted in structural problems of declining farm size, low
productivity, inadequate infrastructure and environmental degradation. The
result is that it has been difficult for the sector to play a dynamic role in the
developmental process through providing an expanding national market and
source of inputs for domestic producers. But at the same time, it is proving
impossible to generate productive employment outside agriculture, in particular
in manufacturing.
The current economic crisis creates both the necessity and the opportunity
for a change of direction. This Least Developed Countries Report is based on
the view that the crisis should be grasped as a turning point in the development
path of LDCs.
In order to overcome LDCs’ structural constraints and reduce their external
dependence, it is necessary to reconsider the role of the state. The market only
works through incremental changes and small steps. However, LDCs need to
stimulate investments by socializing risk, in order to achieve long-term structural
5
transformation. The market has not been and will not be able to carry out these
changes alone.
The critical question now is not simply how LDCs can cope with the shortterm immediate impact of the crisis. More important, the question is how can
they emerge from the crisis in a stronger position? What policies should they be
crafting now for the post-crisis era?
The present Report suggests that three major policy orientations are
required:
• Firstly, there is even more reason now to refocus policy attention on developing
productive capacities. This means that policies should be oriented towards
stimulating productive investment, building technological capabilities, and
strengthening linkages within and across sectors and between different
enterprises. Strengthening domestic productive capacities should also be
aimed at producing a wider range of more sophisticated products;
• Secondly, it is necessary to build a new developmental state. This is not
a matter of going back to old-style development planning, but rather a
question of finding new forms of development governance appropriate for
the twenty-first century. Such development governance would be founded
on a strategic collaboration between the state and the private sector, that
will encourage the structural transformation of LDCs from agrarian to postagrarian economies; and
• Thirdly, it is necessary to ensure effective multilateral support to LDCs.
This is not simply a question of more and better aid, but also the design of
rules that govern international economic relationships with regard to trade,
finance, investment and technology flows, in ways which would support
development in LDCs. It is also critical that support for LDCs does not impose
unnecessary limits to the measures that governments can take to promote
development, structural transformation and poverty reduction.
Both national and international policies are necessary. However, this
Report leaves aside the question of effective multilateral support and focuses
on the second orientation mentioned above, namely the national policies
and institutions for promoting development and the possibility of building the
developmental state in a way which is adapted to the challenges and concerns
of LDCs in the twentieth-first century. This will allow addressing the first policy
orientation mentioned above.
6
2. The role of the State
in promoting development in
LDCs
The basic argument of this Report is that, in the wake of the financial crisis,
there is a need to rethink the role of the state in promoting development in
LDCs. However, neither the good governance institutional reforms which many
LDCs are currently implementing, nor the old developmental state, including
successful East Asian cases, are entirely appropriate models now. Addressing
the structural problems of LDCs will require a rebalancing of the roles of the
state and the market. Discussion on the issue of governance must move beyond
unhelpful and false dichotomies. Governments do not face a stark choice of
good versus evil, the “vice” of state dirigisme versus the “virtue” of markets,
privatization and deregulation. This is a false caricature. The institutions of
the “state” and the “market” have always coexisted organically in all marketbased economies; hence, the “choice” between the market and the state is
a false dichotomy. This has been recognized at least since the time of Adam
Smith, although these insights have been lost in subsequent interpretations.
The challenge is to design effective governance practices which interrelate
states and markets in creative new ways in the service of national development
within a global context.
What is required now is a developmental state that is adapted to the
challenges facing an interdependent world in the twenty-first century. This
state should seek to harness local, bottom-up problem-solving energies through
stakeholder involvement and citizen participation that creates and renews
the micro-foundations of democratic practice. It should also embrace a wide
range of development governance modalities and mechanisms within a mixed
economy model to harness private enterprise, through public action, to achieve
a national development vision.
The limits of the good governance institutional reforms
What constitutes “good governance” is inevitably contestable because the
goodness of governance rests on values and ethical judgement. One list of the
core principles of good governance which has been suggested and is useful,
because it is universal rather than culturally specific, is the following:
7
• Participation: the degree of involvement by affected stakeholders;
• Fairness: the degree to which rules apply equally to everyone in society;
• Decency: the degree to which the formation and stewardship of the rule is
undertaken without humiliating or harming people;
• Accountability: the extent to which political actors are responsible for what
they say and do;
• Transparency: the degree of clarity and openness with which decisions are
made; and
• Efficiency: the extent to which limited human and financial resources are
applied without unnecessary waste, delay or corruption.
These principles, together with a commitment to predictability in policies
and rules, could be realized through a variety of institutions or institutional
configurations.
It must also be recognized that the goodness of governance is not simply a
matter of processes of governing, but also a question of effectively achieving
outcomes. It would be a curious type of “good governance” if the governance
processes were considered to be perfect, according to the valued principles,
but the outcomes were poor. For a country concerned with promoting
development, good governance should thus also encompass governance which
effectively delivers development.
LDCs should aspire to a kind of good governance in which the practices of
governing are imbued with the principles of participation, fairness, decency,
accountability, transparency and efficiency in a non-culturally-specific
way. They should also aspire to a kind of good governance which delivers
developmental outcomes, such as growing income per capita, achieving
structural transformation, expanding employment opportunities in line with the
increasing labour force and reducing poverty. However, at present, the good
governance institutional reforms which are being propagated and undertaken
in the LDCs are founded on a much narrower view of what constitutes good
governance. This narrower view does not have an explicit developmental
dimension.
The narrower understanding is rooted in an implicit dichotomy between
good and bad government systems. This contrasts a formalized type of good
governance system with an informal, personalized, bad governance system. Both
8
these governance systems are “ideal types”, i.e. abstractions from individual
countries, with the good governance systems stereotypically understood to
be typical of developed countries, whilst the bad governance systems are
stereotypically understood to be typical of poor countries. The good governance
institutional reform agenda seeks to turn these bad governance systems into
good governance systems. This involves introducing into developing countries
particular types of institutions which are characteristic in developed countries.
It has also involved prescribing a particular role for the state.
One major type of institution which the good governance reform agenda
seeks to introduce is electoral democracy. This intrinsically valuable institution
is intended to ensure that policies and governance practices are regularly
scrutinized by the general public. The good governance agenda also includes
a style of public administration and management known as “new public
management”. This approach advocates that government should be run
according to private sector styles of management with an active, visible handson approach, using market mechanisms, client orientation and performance
management to increase productivity, often favouring the unbundling of
monolithic organizations into corporatized units and decentralization.
The role of the state that the current good governance reform agenda
prescribes is essentially to support markets by adopting policies and providing
institutions that free markets to work efficiently. Initially, in the 1980s, the
institutional reforms were oriented towards a minimal and laissez-faire state.
But since the 1990s, there has been limited recognition of the existence of
market failures as well as the need to build states which can capably support
markets. From this perspective, particular priorities for institutional reforms have
included (a) achieving and maintaining stable property rights; (b) maintaining
good rule of law and contract enforcement; (c) minimizing expropriation risks;
(d) minimizing rent-seeking and corruption; and (e) achieving transparent and
accountable provision of public goods, particularly in health and education, in
line with democratically expressed preferences.
Irrespective of the intrinsic value of the institutions recommended in this
reform agenda, an important question for LDCs seeking to promote economic
development is whether or not these institutional reforms deliver instrumentally
for development.
9
This issue unleashes fierce passions. The evidence is clouded by severe
methodological problems in measuring the quality of institutions. One critical
insight from cross-country statistical analyses is that the quality of governance
is closely associated with levels of per capita income. That is to say, according
to the indicators, high income per capita is associated with good governance
practices and low income per capita with the absence of good governance
practices. However, it is much more difficult to identify a close relationship
between the quality of governance and growth of per capita income over time.
As the United Nations Committee for Development Policy, which reviews the list
of LDCs, put it in its annual report in 2004, “There is some empirical evidence
to suggest that weak governance reinforces poverty”, but the relationship
between governance and poverty reduction is not yet decisively proven and
“in the absence of conclusive evidence, it is plausible to suggest that the link
sometimes exists, but that at other time, there is no link”. This is particularly “in
the light of the superior economic performance for some countries that are not
ranked very highly with respect to good governance”.
Existing practice of implementing the good governance reform agenda
on the ground also shows that the agenda is so ambitious that it can lead to
reform overload, which is itself incapacitating. In the end, it is questionable
whether it is possible or desirable to transfer institutions of governance which
are functioning in advanced countries into very poor countries with a much
smaller financial resource base. The average government final consumption
expenditure (an amount which covers all government current expenditures
for purchases of goods and services, including compensation of employees)
in LDCs in 2006 was just $60 per capita. This may be compared with $295
per capita in lower-middle-income countries, $1,051 in upper-middle-income
countries and $6,561 in high-income countries. The central question is, “How
can the institutions of rich countries be expected to work with this financial
base?” The answer is that they cannot.
A forward-looking agenda
for development governance
LDCs need to go beyond the current good governance institutional
reform agenda and pursue good development governance. Development
governance, or governance for development, is about creating a better future
for members of a society through using the authority of the state to promote
10
economic development, and in particular to catalyse structural transformation.
In general terms, governance is about the processes of interaction between
the government — the formal institutions of the state, including the executive,
legislature, bureaucracy, judiciary and police — and society. Development
governance is governance oriented to solve common national development
problems, create new national development opportunities and achieve
common national development goals. This is not simply a matter of designing
appropriate institutions, but also a question of policies and the processes
through which they are formulated and implemented. Which institutions matter
is inseparable from which policies are adopted. Development governance is
thus about the processes, policies and institutions associated with purposefully
promoting national development and ensuring a socially legitimate and inclusive
distribution of its costs and benefits.
During the 1960s and 1970s, development planning was very common.
Indeed, LDCs were often recommended by international financial institutions
and donors to engage in development planning. After the debt crisis of the
early 1980s, structural adjustment programmes were generally adopted in most
LDCs and they discontinued development planning and policies designed to
promote development and dismantled their associated institutions. The role of
the state in economic life was drastically downsized, as there was a shift towards
laissez-faire embodied in a reform programme of stabilization, privatization,
liberalization and deregulation. However, some developing countries, notably
in East Asia, maintained and evolved the apparatus of a developmental state
throughout this period.
In calling for development governance now, this Report is not arguing for
a return to old-style development planning. Nor is it calling for a return to the
developmental state of the 1960s and 1970s. It must be recognized that there
have been both successes and failures associated with developmental state
action. However, the Report does argue that it is possible to design a forwardlooking agenda for development governance in LDCs by drawing lessons about
economic governance in successful developmental states in the past and by
adapting them to the twenty-first century.
The main lessons from economic governance from successful developmental
states are that national policies were oriented to promoting structural
transformation and this was achieved through a mix of macroeconomic and
sector-specific productive development policies. These sectoral policies were
11
directed to both agriculture and the non-agricultural sectors. Agricultural
policies were designed to address the structural constraints limiting agricultural
productivity and build up domestic demand in rural areas in the early stages
of development. But they were complemented by an industrial policy which
fostered structural transformation both intersectorally and intrasectorally. This
policy mix was not simply about establishing new activities, but rather aimed
at promoting capital accumulation and technological progress as the basis
for dynamic structural change. In the language which UNCTAD has used in
past Least Developed Countries Reports, they were geared toward developing
productive capacities, expanding productive employment and increasing labour
productivity, with a view to increasing national wealth and raising national living
standards.
A basic feature of development governance in successful developmental
states was the adoption of a mixed economy model, which sought to discover
the policies and institutions which could harness the pursuit of private profit to
achieve national development. This Report does not romanticize the capabilities
of public officials in successful countries. They were not omniscient Supermen
and Bionic Women. However, competent bureaucracies were constructed in a
few key strategic agencies, and state capabilities to promote development were
built up through a continuous process of policy learning about what worked
and what did not work. Governments also did not devise policies in a topdown fashion, but in close cooperation and communication with the business
sector. The whole process was driven by a developmentally-oriented leadership
of politicians and bureaucrats committed to achieving a development vision
for society rather than personal enrichment and perpetuation of their own
privileges. The political legitimacy of this visionary group was rooted in a
social contract, in the sense that the aims of the developmentalist project were
broadly shared within society and there was societal mobilization behind the
goals of the project. The risks, costs and benefits of structural transformation
were shared amongst the different groups of society.
Building a new developmental state which is capable of meeting the
challenges of the twenty-first century will involve:
• Giving greater emphasis to the role of knowledge in processes of growth
and development. This directs attention to the important role of knowledge
systems and national innovation systems, alongside financial systems, as
critical institutional complexes in the development process;
12
• Considering how to promote economic growth and structural transformation
through a type of diversification which does not rely solely on industrialization.
In this regard, there is a need to shift from economic activities characterized
by decreasing returns to those characterized by increasing returns;
• Exploring how to make better use of the opportunities of interaction between
domestic and foreign capital by increasing the developmental impact of FDI
and upgrading through links with global value chains; and
• Adopting a regional approach to developmentalism which exploits potential
for joint action to create the conditions for structural transformation
The new developmental state should also move away from the authoritarian
practices that have been associated with some East Asian developmental success
stories. It is possible in this respect to draw on other types of developmental
state, including for example the Nordic model or the Celtic Tiger. Building
democratic developmental states should involve, in particular, ensuring citizens’
participation in development and governance processes. What this means
is greater emphasis on deliberative democratic approaches in which people
and their organizations interact to solve common problems and create new
development opportunities.
One positive feature of successful developmental states in the past was
that governments used a range of practices to encourage and animate the
private sector to act in ways which were designed to support a development
transformation. The successful developmental states were not high “tax-andspend” governments. Rather, they fulfilled four major functions which sought
to catalyse the creative powers of markets: (a) providing a developmental
vision; (b) supporting the development of the institutional and organizational
capabilities of the economic system, including developing entrepreneurs and
building the government’s own capabilities; (c) coordination of economic
activities to ensure the co-evolution of different sectors and different parts of
the economic system; and (d) conflict management.
The twenty-first century developmental state should continue to use a wide
range of governance mechanisms and modalities within a mixed economy model
to harness private enterprise to achieve a national development vision. In doing
this, it is now possible to apply new thinking on “modern governance”, which
advocates that governments promote multiple forms of two-way interaction
between public and private actors. In this respect, development problems will
be addressed not simply through the formal and impersonal procedures of the
13
market — or top-down, ex ante goal-setting of hierarchical governance —
but also through continuing reflexive procedures, in which different actors in
networks identify mutually beneficial joint projects, refine and redefine them
as they monitor how far they are being achieved, and respond to changes in
the external environment. The new developmental state is also likely to adopt
a wide array of policy instruments which goes beyond a “one-size-fits-all”
approach. Instead, a mix of policy instruments which are appropriate for the
particular context should be selected, with the state more or less involved and
with different degrees of compulsion and voluntary action in the way in which
outcomes are achieved.
Some development governance priorities for LDCs
Development governance should be at the heart of the LDC response to the
global financial crisis. There is no unique optimal model which is applicable to
all countries; responses must be tailored to country circumstances. However,
the present Report recommends that most LDCs should adopt sector-specific
development policies to promote agricultural productivity growth and industrial
transformation. This should encompass both developmental agricultural
policies and developmental industrial policies. The Report also recommends
that these sectoral policies should be supported by a more growth-oriented
macroeconomic policy. The positive interplay between a growth-oriented
macroeconomic policy and the sectoral policies — which improve meso-level
and micro-level capabilities, incentives, institutions and infrastructure — is vital
for sustained development success and substantial poverty reduction. These
policies should aim to develop the domestic productive capacities of the
LDCs. Such policies would serve not only to mitigate the short-term impact of
the crisis, but also propel the LDCs on a different development trajectory for
the post-crisis era, a trajectory which is more dynamic, more resilient, more
inclusive and less dependent. This is necessary to prevent future exposure to
external shocks and externally-generated crises. Possible policy directions for
macroeconomic policy, agricultural policy and industrial policy are discussed
in the next three sections of this overview, whilst the last section takes up the
issue of priorities in an institutional reform agenda to build developmental state
capabilities for good development governance.
14
3. Meeting the macroeconomic challenges
For much of the last three decades, macroeconomic policies in the LDCs have
been strongly influenced by the recommendations of the international finance
institutions and bilateral aid donors. Typically, the main recommendations have
been that monetary policy focuses on containing inflation and creating an
environment for private investment, and fiscal policy should ensure that fiscal
deficits remain below 3 per cent of GDP. Public investment has generally not
been seen as having an important role in promoting economic development
and structural change. Behind this policy stance were fears of inflation. This was
significant in the 1980s and 1990s. However, inflation has not been a special
problem in most LDCs during the current decade. Moreover, the source of past
inflation has usually been structural rather than due to loose monetary policies.
Worries that the excessive government spending could ”crowd out” private
investment and fuel inflation are an unlikely outcome in countries where there
is widespread under-utilization of all resources. The contention of this policy
was that liberalization of trade and finance, privatization and minimization of
government intervention in the economy would provide the spur to private
sector development and hence sustained growth. As argued in previous
editions of this Report, the reforms based on this approach have largely failed
to develop the private sector as the driving force for development.
The present Report argues for a marked change in the approach to
macroeconomic policies in the LDCs and for one that recognizes that
government has a vital role to play in restructuring the economy and in
creating the conditions for a “takeoff” into sustained growth. Since economic
development is about societal transformation — it is not just a technical
economic problem to be left to economists — governments must also act to
ensure that the costs and benefits of adjustment are distributed in an equitable
and socially acceptable manner. Failure to do so would likely produce social
unrest and a general backlash against necessary reforms.
Public investment — especially but not exclusively in traditional
infrastructure such as transport, irrigation and energy networks — has a key
role to play in driving the development process. This has tended to deteriorate
in recent years as ODA has been more directed toward social issues. Social
concerns are important, but if progress on these is made at the expense of
needed public investment in production sectors and economic infrastructure,
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the basis for sustained growth will be undermined. Given the severity of the
current economic crisis, LDC governments will be faced with rising fiscal
deficits as they try to maintain domestic demand and if they also attempt to
boost infrastructure investments. These deficits will need to be accommodated
over the short-to-medium term in order to mitigate increased hardship for the
population and to keep development programmes on track. Given the limited
alternative sources of finance, ODA will be critical in enabling these objectives
to be met. LDC governments will still have to explore innovative ways of raising
revenue, but they need to do so in ways that avoid regressiveness, and which
take account of the still-limited administrative capabilities of the state.
Excessive reliance on monetary policy as a source of macroeconomic
stability limits the effectiveness of monetary policy beyond price stabilization,
owing to the underdeveloped state of financial institutions and the absence of
viable bond markets. LDCs are generally faced with structurally high real rates
of interest that are simply not conducive to an investment-driven growth path.
For most of these countries, the credit crunch is more of a chronic condition
than a consequence of the global banking crisis. The dramatic effects of a credit
shortage have become apparent in rich countries in the current financial crisis.
But this is actually a picture of everyday business life in LDCs.
Monetary policy in LDCs should focus on supporting investment-focused
fiscal policy, and one way to ensure this would be to have the central banks
cooperate more closely with other departments of state in developing and
promoting the overall economic development programme of their countries.
As we argued in the Least Developed Countries Report 2006, addressing the
weaknesses of domestic financial institutions should be a priority in a strategy
to develop productive capacities.
Another key support for an investment-driven strategy is to manage the
exchange rate and, as a corollary, the capital account of the balance of payments.
The current orthodoxy of floating rates, usually combined with monetary
policy focused on inflation targets, has increased exchange rate volatility
and frequently undermined domestic macroeconomic stabilization efforts.
Managing the exchange rate — through a managed float or an adjustable peg,
for example — requires resources and policy capabilities. However, it allows
greater macroeconomic policy options. There is no single model of exchange
rate management applicable to LDCs, but there is increasing consensus that the
extreme solution of purely floating or totally fixed pegs do not work. Managing
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the exchange rate — through a managed float or an adjustable peg, for
example — would (a) support fiscal policy by helping to avoid a depreciation
because of exaggerated fears of inflation; (b) aim to check the volatility of the
rate following external shocks; and (c) seek to stabilize the exchange rate at a
level that would strengthen the competitiveness of exports, especially of new
products, and support the diversification of the economy.
The effectiveness of capital controls in reducing highly speculative flows and
exchange rate instability in the short run has been shown by previous crisis
experiences in emerging market economies. Destabilizing surges of inflows and
outflows of speculative capital occur suddenly and have been a regular feature
of the financial system over the last 30 years, so it is important for countries to
be able to deploy such controls whenever they consider it necessary. For most
LDCs, the most common problem at present may be dealing with outflows of
capital (including capital flight on the part of elite groups), but commodityproducing countries also experienced speculative capital inflows during the
recent boom in world prices, and short-term measures may be necessary now
to slow down the outflow of speculative portfolio investment.
4. Setting the agenda for agricultural policy
In addition to the effects of the global economic crisis on their exports,
developing countries — and especially the LDCs — suffered a severe shock in
the first half of 2008 from the sharp rise in food and energy prices. There had
already been a steady rise in prices from around 2000 but, between the last
quarter of 2007 and the second quarter of 2008, non-fuel prices rose by some
50 per cent and crude oil prices by nearly 40 per cent. These increases pushed
millions more people into hunger and poverty, provoking widespread riots and
social unrest in many of the poorest countries. Prices have since fallen sharply,
although at the start of 2009 they were higher than in 2005. Moreover, the
Food and Agricultural Organization of the United Nations (FAO) has reported
that local food prices in most of sub-Saharan Africa and in many countries of
Asia and Central America in the first quarter of 2009 were still higher than a
year earlier.
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The food crisis of 2008, however, was in reality a sharp reminder of the
precarious state of food supply in many parts of the world, not least in the
LDCs, a situation that has been deteriorating for many years. Among the longerterm influences on prices has been the collision between rising food demand
in some of the largest emerging market economies with a relatively inelastic
response of supply. For the LDCs, the food crisis is really a chronic rather than a
short-term problem, the result of low or falling levels of agricultural investment
and fundamental failures of policy. It has long been UNCTAD’s judgement that
an effective strategy for growth and development, based on the creation of
new comparative advantages and production capacities, cannot succeed unless
agriculture is made more productive. Without a significant agricultural surplus,
food security will remain precarious and diversification of the national economy
into manufacturing and other sectors will be undermined by rising food prices
and wage costs.
The medium- and long-term problems of agriculture in the LDCs are
considerable: (a) decades of neglect have left productivity in decline or
stagnant; (b) there are growing population pressures on the available stock of
productive land; and (c) there are also increasing pressures on the supply of
land for food production from climate change and from incentives to switch
to the production and export of bio-fuels. It is the argument of this Report that
these problems can only be tackled effectively with a significant developmental
role on the part of the state. In contrast, the main thrust of the neo-liberal
approach to agricultural development since the 1980s has been to diminish the
role of the state and to enhance that of the private sector. Agricultural marketing
boards were privatized, farm subsidies were reduced or abolished, and the
functions of the state were narrowed to the provision of public goods, such as
research and development and certain infrastructure investments. The overall
impact of these reforms has been very mixed. As shown in the Least Developed
Countries Report 2006, agricultural productivity has stagnated or declined in
many LDCs. Reversing this trend will require, first, a firm commitment on the
part of LDC governments to give high priority to agriculture in their development
programmes and especially to increase the share of public investment in GDP.
An effort at institutional reconstruction will be needed, insofar as ministries of
agriculture are generally among the weakest departments of the state. Their
present capacity to deliver extension services to the agricultural sector and,
more generally, to play a strategic role in national development, is very limited
and needs to be reversed. In some LDCs, the gaps in such services are being
filled not by the private sector but by non-governmental organizations and
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international organizations. Ministries of agriculture need to be incorporated into
the central policy planning of governments for development. The rehabilitation
of ministries of agriculture could well be a litmus test of an LDC government’s
commitment to a revived and coherent development strategy.
Agriculture is highly complicated and inter-country differences in land rights,
climate, soil qualities, social structures and so on rule out any single policy
prescription for all LDCs. However, a number of general points can be made,
although their individual weights will vary with different national contexts. For
example, land rights and systems of tenure vary widely but, in terms of general
governance, the key principle is that land rights should be secure, transparent
and enforceable by law. If these conditions are met, and tenure is not restricted
to unreasonably short periods, the economic value of land should rise and
one serious source of disincentives to raising productivity will be removed. A
corollary, of course, is that a government committed to national development
must act firmly against the illegal expropriation of land, a problem that has
plagued many LDCs.
The emphasis of this Report is on restoring an active development role
to the state and on reviving public investment within a coherent policy
framework. In the case of agriculture, effective state intervention will also need
to be supported by effective local authorities which are in closer touch with
local communities and therefore better informed about their precise needs.
At the same time, however, it must be recognized that local authorities can
hinder development with predatory and arbitrary behaviour towards the local
population under their authority. Striking a correct balance between different
levels of authority and ensuring policy coherence between them is therefore an
important condition for an effective developmental state. Public investments,
in turn, must be carefully targeted at key structural constraints, which may
consist of poor or missing infrastructure, poor education and training, lack
of small credit facilities, and so on. The essential point is that well-prepared
public investments, including a careful assessment of likely linkage or multiplier
effects, will crowd in private initiative and investment. In approaching the
problems of agricultural underdevelopment, however, it is important not to
frame the issues just in terms of farmers and crop or livestock production, but
more broadly in a context of developing the “rural economy”, or rather “rural
economies” in countries where the national economy is still weakly integrated.
These would focus on developing clusters of interrelated activities, including
various services to support the local community. Given the likely constraints on
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governments’ finances in the foreseeable future, it will be worthwhile to look
closely at possible alternative modes of financing infrastructure projects.
The presence of a rural economy in a given area does not mean that it
is either possible or desirable to promote a flourishing rural non-farm (RNF)
economy, either through work for wages or self-employment. (The RNF
economy may be defined as comprising all those non-agricultural activities
which generate income to rural households, including in-kind income and
remittances.) In some contexts — e.g. mining and timber processing — RNF
activities are also important sources of local economic growth. For some areas,
the only future might be the long-term decline of farming, accompanied by
substantial outward population migration. What this implies, essentially, is that
— before contemplating serious measures to promote agricultural growth and
RNF intersectoral linkages in a given area — LDCs should take a hard look
at agriculture in that area, examine its economics and consider what income
levels it can reasonably support.
Moreover, it is important for policymakers not to discriminate against people
residing in rural areas. In designing economic policy, and the accompanying
institutional reforms, the focus should be on generating improved incomes and
living conditions for the whole population. In all cases, support and institutional
measures should consider the medium- and long-term economic viability of the
activities and people benefiting from intervention (sustainability), whether rural
or urban, which is difficult to assess reliably, and thus vulnerable to political and
pressure group manipulation.
Policy for the promotion of RNF intersectoral linkages may be more a
matter of attending to some well-known areas rather than advocating novel
approaches. Basic points include the importance of education and of having
the physical infrastructure in place. Also, the development and dissemination
of appropriate technological packages aimed at emerging smallholder farmers
could significantly enhance agricultural productivity. There is much to be
done to resolve the credit and finance bottleneck. Fortunately, the lessons of
microfinance are being learned and may provide useful lessons and application
for the LDC RNF economy. Providing business support services in training,
technical assistance and information is important, but it is not clear where the
“best” models lie. The role of the state will be critical in this regard. Governments
should, under specific conditions, become involved in seasonal finance,
infrastructure provision, input supply and subsidies (to cover transaction costs),
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land reform and extension services, to promote the growth of the sector. The
need for policy space in this context cannot be overemphasized, since learning
is an experimental process that is time-consuming and costly.
In view of weak institutional and administrative structures, it will also be
important to explore other organizations as alternatives to private enterprise
and the state – such as farmers’ groups and other local cooperatives – for the
organization of supplies of inputs, machinery, credit and so forth. Such collective
effort can encourage productivity growth throughout the rural economy at the
local level and may often be able to be developed on the basis of traditional
forms of cooperation.
In the present Report, we highlight seven key strategies that should govern
LDC interventions to promote the development of the sector and promote
inter-linkages:
• Prioritize activities that are targeted at local and regional markets;
• Support producers to meet market requirements;
• Improve access to product and factor markets for the rural population;
• Whenever relevant and feasible, encourage the development of commoninterest producer associations and cooperatives;
• Develop flexible and innovative cross-sectoral institutional arrangements;
• Recognize the diversity of agricultural production and adopt a subsector
approach to the policy intervention, investment or development programme;
and
• Develop sustainability strategies from the start of any investment or
development programme.
LDC economies need to improve agricultural productivity and diversify
their economies to create non-agricultural employment opportunities and
generate intersectoral linkages. This will require a new development model
focused on building productive capacities, enhancing rural–urban intersectoral
linkages and shifting from commodity price-led growth to “catch-up” growth.
This implies a change from static to dynamic comparative advantage, and the
active application of science and technology to all economic activities.
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5. Tailoring industrial policy to LDCs
The nature of developmental industrial policy
Industrial performance in most LDCs has been weak by comparative
standards. Indeed, previous UNCTAD work has shown that, even during
periods of strong investment and growth, the manufacturing sector in many
LDCs, particularly in sub-Saharan Africa, failed to take off. The market-led
reforms since the debt crisis of the early 1980s have, to a large extent, failed
to correct this deep-seated structural weakness. As a result, unbalanced,
stagnating or declining manufacturing performance has been part of uneven and
unsustainable growth in many LDCs over the last three to four decades. In most
LDCs, there is very little large-scale domestic industry: i.e. the manufacturing
sector is largely composed of light manufacturing and other labour-intensive
activities, organized in small enterprises, including in the informal sector, often
employing 20 people or less. On average, light manufacturing, low technology
products accounted for over 90 per cent of all LDC manufactured exports in
the 2005–2006 period (including food, drinks, garments and textiles); medium
and highly manufactured exports are less than 2 per cent of total manufactured
exports.
This Report argues that policymakers at the national and international levels
need to recognize the need for structural change in the development process of
LDCs if they are to reinvigorate growth in activities characterized by increasing
returns, dynamic comparative advantage and rapid technological progress. Not
all economic activities are generators of such growth: for example, commodities
and agricultural activities tend to be characterized by decreasing returns to
scale, low productivity and low rates of formal employment. Different economic
activities transmit different learning patterns and knowledge spillovers. Activities
that generate dynamic growth tend to be those with the ability to absorb the
innovations and new knowledge that produce increasing returns to scale.
Successful growth episodes almost always entail rapid capital formation.
Also, as discussed earlier, pro-investment financial and macroeconomic policies
are essential parts of the policy agenda in LDCs. However, this is not enough
for sustained growth. Recent research indicates that growth accelerations based
on structural change and diversification have exerted an enduring impact on
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productivity performance and economic welfare in developing countries.
Increasingly, evidence suggests that mastery over an expanding range of more
sophisticated products is central to the growth development process.
The pertinent question is how to design a set of policies that would stimulate
the transformation of LDC economies from being dominated by activities with
decreasing or constant returns (agriculture) into those with increasing returns
(processing and manufacturing), as was the case in Malaysia, the Republic
Korea, Sweden, Taiwan Province of China and Finland. The present Report
does not claim it has the solution, but draws on a variety of experiences of
accelerated growth in countries that have undergone successful and rapid
industrialization and thereby contributes to the knowledge of range of policy
choices in LDCs.
The concept “industrial policy” in the context of the LDCs should be
understood in a broad definition, given the relatively small contribution of the
manufacturing sector to the GDP in these economies. The need for continuous
upgrading of products and processes underlies the broad objectives of a
Schumpeterian transformative policy that we call the Developmental Industrial
Policy (DIP), as elaborated in this Report — tailored specifically for LDCs. This
Report defines a DIP as “any strategic intervention by the state that catalyses
structural change and stimulates economic restructuring toward more dynamic,
higher value added activities”. The objective of a proactive DIP is to enable
learning to take place at the level of the firm and the market through both
internal and, more importantly, external economies. This can be done by
transferring skills, capabilities, accumulating knowledge and “know-how” and
diffusing it throughout the society as much as possible.
The function of developmental industrial policy in LDCs transcends “targeting
sectors” or “picking winners”, to provide fundamental support and direction
for satisfying the needs of broad sections of society and setting the terms of
public–private partnerships. The standard conceptions of industrial policy are
far too narrow, when applied to LDCs attempting to embark on programmes of
major economic transformation. In departing from the mainstream perspective,
there are several dynamic objectives the new developmental industrial policy
should strive for:
• Creating a dynamic domestic comparative advantage in an increasingly
complex and sophisticated range of products and services;
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• Upgrading productive capacities, in the sense of innovating to increase value
added. The concept of upgrading — “making better products, making them
more efficiently” — or moving into more skilled activities is critical in this
context;
• Building capability, decreasing social marginalization and reducing poverty
through incomes and “labour market” policies, fiscal policy, entrepreneurship
and technological development policies, as described in The Least Developed
Countries Report 2007;
• Creating conditions for full employment and inclusive growth, through a
compatible combination of pro-growth macroeconomic policies and sectoral
meso-policies, which include consideration of intersectoral linkages;
• Creating conditions for the transformation from agrarian to post-agrarian
societies;
• Improving the supply of all public inputs with a view to raising labour
productivity;
• Facilitating diversification of natural resource activities; and
• Building capacities at the firm level (learning).
It is important to recognize that, in light of historical legacies, initial local
conditions and surrounding international circumstances, industrial development
pathways are not identical. The one-size-fits-all policy prescription of recent
years is no longer feasible. Industrial policy instruments will vary according
to the conditions that prevail in a given economy at a particular time, and
both the form and content of industrial policy should evolve in relation to the
development of market institutions, as well as the capabilities of the state itself to
manage economic change and transformation. Accordingly, this Report argues
that policymakers in LDCs should be given sufficient time and space to set
priorities, discover which policy mix works best in meeting those priorities, and
adapt their institutions and behavioural conventions to changing circumstances
and evolving political and social preferences.
This Report also recognizes that no industrial policy is infallible. Governments
are not omniscient. They have imperfect information, and not all decisions
made by governments are always rational. Governments are also subject to
capture by special interests. The same criticisms, however, apply equally to the
market. The key question is the costs and benefits associated with each. This
Report takes the view that finding the appropriate balance between states and
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markets is important, and that government policy is a fundamental influence
on growth and industrialization.
Adapting developmental industrial policy to LDCs
A goal for DIP in LDCs should be to create domestic firms of varying sizes,
including large firms, and to increase the size of their available markets. But
this is not sufficient. It also needs to focus on (a) promoting entrepreneurship;
(b) facilitating and enabling access to new technologies; (c) developing human
resources; (d) general training; and (e) collecting, analysing and diffusing
technical data. This approach advocates state intervention through a proactive
technology policy towards the generation of productive and technological
capabilities at the firm and farm levels. A mixture of general and selective policy
tools is available to governments for promoting technological development.
As argued by UNCTAD in 2007, such an approach needs to differentiate the
different phases of development, namely between infant and mature industries.
One of the priorities of industrial policy in LDCs is to create the conditions for
learning, through the acquisition of technological and productive capacities.
Market signals, if left to themselves, may even discourage the accumulation
of technological capabilities. At the enterprise level, the state needs to invest
in the accumulation of technological capabilities and to create the conditions
to stimulate learning. At the national level, the state needs to find and ensure
financing for technical change and innovation. Creating these conditions is a
core function of the developmental industrial policy.
The proposed developmental industrial policy should build firm-level
capacities by generating a cumulative process of growth of commercial
innovation in the business sector, until that growth becomes internalized.
Policy implementation should aim at rapidly generating a critical mass of firms
undertaking commercial innovation, i.e. continually introducing products
and processes that are new to the country. Institutional mechanisms should
be devised to ensure that sufficient financial resources are made available to
encourage risk-taking activity and cover the costs of learning. This perspective
shifts the role of the industrial policy towards one that focuses on facilitating
assimilation through learning (copying, imitating and eventually innovating),
in addition to capital accumulation. This implies that the modern form of
industrial policy is indispensable for articulating the links between science,
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technology and economic activities, through networking, collaboration and
fine-tuning the learning components (education, research and development,
and labour training) into an integrated development strategy. However, such
interactions cannot be created by decree — they require institutions, resources
and capabilities.
In devising how to do this, LDCs should not simply look to the policy tools
used in East Asia. Industrial policy success is not limited to East Asian newly
industrialized countries, with their unprecedented and sustained growth
experiences. Some form of industrial policy to promote development has been
used in most economies. It has been argued that a long history of successful
industrial policy in advanced economies since the nineteenth century persists.
Examples include (a) the first-tier East Asian newly industrialized countries, such
as Japan, Hong Kong (China), the Republic of Korea, Singapore and Taiwan
Province of China; (b) the Nordic countries, such as Sweden and Finland;
(c) Ireland; (d) some Latin American countries; and (e) almost all developed
market economies. There are also interesting examples from South-east Asia,
including Malaysia and Thailand, and both Bangladesh and Cambodia have
had successful experiences in increasing manufacturing employment and value
added.
Beyond a few core elements, there is no single homogeneous model of
state–market relations into which the appropriate industrial policy can be
inserted. Each country must experiment and find the configuration of institutions
and conventions that will work best in its national conditions and meet the
expectations of its population. Particularly where large structural changes are
involved and there is a significant level of risk and uncertainty about the sources
of progress, careful experimentation with institutions and policies is needed to
discover what will be effective in a particular national context, where history,
culture and initial economic conditions all have important influences on the
possibilities for growth and development. Given the premium on flexibility and
“adaptive efficiency”, and also given the absence of universal laws of economic
growth, restricting the policymaking space available to developing countries is
more than likely to be counterproductive. The underlying assumption argued
by this Report is that — owing to externalities, missing institutions, economies of
scale and many other types of market failure — markets alone cannot be relied
upon to coordinate the processes of capital accumulation, structural change
and technological upgrading in a way consistent with sustainable growth and
development.
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LDCs can deploy a large menu of instruments for industrial development,
including preferential treatment reflected in incentives or support targeted at
building particular capabilities, a plethora of fiscal and investment incentives,
as well as trade policy tools (tariffs and non-tariff barriers), subsidies, grants or
loans. Most of these can be used to encourage capacity-building in the private
sector and stimulate the process of economic transformation. Moreover, “newstyle” industrial policy tools — such as fiscal and investment incentives — are
less susceptible to rent-seeking and more self-limiting than tariffs or quotas.
Additionally, governments can facilitate this process by strengthening their
domestic financial institutions, whether state-owned development banks such
as the BNDES in Brazil, or privately owned credit institutions, such as Grameen
Bank in Bangladesh.
6. Building developmental
state capabilities in LDCs
It is advisable to be realistic about the task of building capable developmental
states in LDCs. Both skilled staff and financial resources are in short supply, and
the constraints noted earlier on the problem of institutional reform overload in
relation to “good governance” apply equally to the vision of good development
governance which is being recommended here. However, one should not be
too pessimistic on the basis of past experience. Firstly, from the experience of
successful developmental states, it is clear that the technical capacities of their
governments for promoting development were not particularly advanced at the
outset. They built up developmental state capabilities over time, often through
a deliberate strategy that focused in particular on improving a few strategically
important public agencies. Large-scale institutional transformations, such
as those being attempted in the good governance reform agenda, were not
necessary to get the process going. Secondly, the limited success of recent
experience of institutional reforms in LDCs is particularly related to the fact that
these initiatives have often been donor-driven. The more a developmentalist
project is country-owned, the easier the building developmental state
capabilities should be.
A pragmatic approach to building developmental state capabilities in LDCs
would be a focused approach which seeks to sequentially build minimum
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governance capabilities for achieving evolving development outcomes. This
would involve the adoption of a small number of institutional reforms which
have a “good fit” with the existing context. Models transferred wholesale
from successful East Asian newly industrializing economies are likely to be as
unsuccessful as models of good governance transferred from advanced countries.
Institutional reforms will progress if (a) their outputs and outcomes meet the
political demands for them; (b) there is a good fit between political capacity
and technical capacity; and (c) technical competencies fit the requirements of
the reform tasks.
Both technical capacity and political capacity matter. Technical capacities
can be built up incrementally through policy learning and institutional
experimentation, focusing initially on extending the experience of islands of
excellence within the public administration and executive agencies. Such a
strategic incrementalist approach should aim to build governance capabilities
required to relax binding constraints on the development of productive
capacities. It should develop governance capabilities that support processes of
capital accumulation and technological progress in sectors that are strategically
important for economic development and the generation of productive
employment. Islands of excellence within the ministries and executive agencies
of LDCs — which are hidden by the country-wide governance indicators —
can provide lessons about what works and does not work in particular contexts,
and also models for spreading these practices. However, it is important that
there be a competent pilot agency, close to political power, that can provide
overall vision and coordination. Moreover, an institution dedicated to aid
management is also critical.
In terms of political capacity, a defining characteristic of successful
developmental states is the existence of developmentally-oriented leadership.
Unless such a leadership exists, there is no possibility of creating developmental
state capabilities. If a governing elite is simply committed to personal enrichment
and perpetuation of its own privileges, rather than national development,
structural transformation and economic development will be impossible.
This leadership will be most successful if it establishes a social compact
through which broad sections of society support the development project. This
should include both rural and urban interests and thus developmental policies
should include both developmental agricultural policies and developmental
industrial policies. A final important ingredient is the development of growth
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coalitions. These arise when relations between business and government elites
take the form of active cooperation towards achieving the goals of fostering
investment and technological learning, and increasing productivity. LDC
governments should use the financial crisis as a moment to build positive growth
coalitions between governments and the domestic business community.
Finally, it is important to note that, without the support of LDC development
partners for a domestically-owned developmentalist project, that project will be
very difficult to realize. Firstly, policy space is necessary, to allow policy pluralism
and experimentation, which are necessary conditions for developmental
success. Adhesion to international agreements, policy conditionalities attached
to aid and close guidance by donors should not undermine the policy learning
critical to building developmental state capabilities. Secondly, the formation
of domestic growth coalitions can be stymied if aid is more oriented to donor
concerns than to building up domestic business. Paradoxically, although past
policies have been ostensibly focused on private sector development, the private
sector remains very weak in most LDCs. It is vital therefore that aid support the
formation of growth coalitions. Thirdly, domestic financial resource constraints
also mean that donor support will be necessary to build developmental state
capabilities.
Development partners can best support genuine country ownership in
LDCs, and also achieve mutual goals, by supporting the realization of national
developmental aspirations. Approximately 20 per cent of aid to LDCs now
goes to improve government capabilities. This aid should be refocused from
the current good governance institutional reforms towards promoting good
development governance and building developmentally-capable states in
LDCs.
*
*
*
The basic message of this Report is that LDC governments should view the
global economic crisis as an opportunity for a turning point in their development
path. They need to shift towards a catch-up growth strategy based on the
development of productive capacities and expansion of productive employment
opportunities. The Report argues that LDC governments have a vital role to
play in the restructuring of their economies, and in creating conditions for
catch-up growth. It is high time to inject a developmental dimension into the
good governance agenda. LDC policymakers need to be more cognizant and
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informed of the policy options that exist and have been used successfully in
other cases of accelerated growth and structural transformation. The Report
is intended to contribute to this process and increase the capacity of LDCs
to govern developmentally. The development partners and the international
community should support the LDCs in their quest for good development
governance. The crisis demands that it is time to catch up, by broadening and
adapting public action to conditions suitable for small, open-market developing
economies. Historical evidence suggests that this objective is achievable. This
Report sketches out a concrete alternative economic strategy and a fresh
agenda for LDC policymakers that include institutional capacity-building and
the strengthening of the market-complementing developmental state.
Dr. Supachai Panitchpakdi
Secretary-General of UNCTAD
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